This excerpt is part of Stratas Advisors’ Global LNG and Asia services.
Faced with brutal market conditions and an $18.5-billion price tag on its Gladstone LNG plant, Santos has announced the almost unprecedented move to cut production at its brand new Australia facility. After bringing the export terminal online less than a year ago, Santos management said that it would look to operate both trains at a reduced capacity to stay as competitive as possible. In addition, the cash-strapped company said that it would opt to source more of its gas supply from third parties as opposed to drilling more coal seam gas (CSG) wells.
Stratas Advisors has previously identified Australia as a market where supply and demand imbalances could cause disruptions to LNG production. Of particular concern are the three facilities located on Curtis Island that are running on CSG wells. Stratas Advisors anticipates that production in those markets will not be able to satisfy both domestic Australian demand and seven new liquefaction projects that have and will continue to strain the gas supply system over the next two years.
In a related development, Santos wrote down the Gladstone asset by $1.05 billion in its first-half results, citing declining energy prices and increased third-party supply prices. The increased demand on the gas grid from Gladstone LNG, Queensland Curtis LNG and Australia Pacific LNG has caused wholesale gas prices in the country to more than double from this point last year, making the low LNG prices in Asia all the more painful for the operators of those plants.
While the implied liquefaction fees for the Gladstone LNG project already indicate a hostile market, Stratas Advisors sees other Australian projects as being even more vulnerable to low prices globally. One of the neighboring projects, Australia Pacific LNG, and two west coast projects in Ichthys LNG and Gorgon LNG all have implied fees in excess of $7/MMBtu.
Those projects are backed by Origin Energy and ConocoPhillips Co., INPEX Corp. and Chevron Corp., respectively. None of those proponents have written down their investments to date. Yet, they are exposed by huge capital outlays and the current pricing environment that crimps liquefaction economics on both the supply and demand side. Based on similar fundamentals facing Gladstone and others alike, Stratas Advisors expects movement from more on this front at some point in the next year or so.
While low LNG prices across key markets in Asia and elsewhere will keep production at the Gladstone facility reduced in the short term, Stratas Advisors anticipates that growing domestic demand in Australia paired with below-expectation production from CSG wells will impair the ability of the east Australian projects in particular to produce at full tilt in the long term.
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